Ikea banks on new store formats to sustain success

Ikea banks on new store formats to sustain success

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Nate Delesline III Reporter

Ikea is expanding its store formats beyond its familiar and famous big blue box locations.

The Swedish-founded and Netherlands-based international retailer had about 370 flagship stores globally, and 460 stores overall in 62 markets worldwide as of February. But despite that global presence, “many people were complaining that our stores were too far away from where they lived, socialize and work,” said Tolga Öncü, chief operating officer and global head of Ikea retail at Ingka Group.

Last month the retailer announced a $2.2 billion investment in its U.S. omnichannel strategy. That initiative will support the opening of eight new stores, nine Plan and Order points and 900 pickup locations. Together, the investments will create over 2,000 jobs, Ikea said in an announcement.

Last year, Ingka Group, Ikea’s largest franchisor, said it plans to invest more than 3 billion euros in its new and existing stores in the U.S., France, Finland, Canada, Germany and Spain. The 3 billion euro and $2.2 billion investments are separate, the company confirmed to Retail Dive.

Öncü, who spoke on stage at ShopTalk in Las Vegas in March and also in a one-on-one interview with Retail Dive, said eight out of 10 Ikea customers start their shopping experience through digital channels like the website or app.

A portrait photo of Ikea executive Tolga Oncu
Tolga ÖncüPermission granted by Ingka Group (Ikea)

But even with such high e-commerce and online engagement, “going forward, there will still be a need for people to touch and feel, and you know, experience the range,” and to have an opportunity to engage with a person face to face to help them navigate their shopping and buying experience, Öncü said.

Ikea sees opportunity in 3 store formats

Partly in response, the furniture and home decor retailer has begun introducing smaller format stores targeted to city locations. One of them is slated to open soon in San Francisco. “It’s a smaller format in our eyes, but in the eyes of the customer, it’s still a very large shop,” Öncü said.

Ikea’s flagship stores typically range in size from about 215,000 square feet to over 500,000 square feet. At that size, it’s often not practical or realistic to bring an Ikea flagship store to a dense urban downtown district. So the retailer is complementing its city store locations, which typically range between 19,000 square feet to just under 200,000 square feet, and its flagship store locations with a third store format.

Ikea’s new Plan and Order locations differ from the other store formats in that they offer delivery only. Customers can also meet in person with an Ikea associate for guidance in designing and selecting kitchens, bedrooms or bathrooms.These locations typically range in size from as small as 1,100 square feet to 8,600 square feet

The company plans to open one of its newest Plan and Order locations in Arlington, Virginia, a Washington, D.C., suburb, this summer. It will occupy about 5,000 square feet of space. (Ikea has flagship stores about a 30-40 minute drive from the heart of D.C. in Woodbridge, Virginia, and College Park, Maryland.)

“The Plan and Order point concept has been created with the unique needs of local consumers in mind, from the proximity to public transportation and delivery and assembly options to the opportunity for affordable design services,” Raquel Ely, market manager for Ikea U.S., said in an announcement about the upcoming DC-area store.

Öncü told Retail Dive that the company plans to continue opening and operating stores in a variety of formats, including its big-box blue stores. The big stores “have been a critical component of our past. They are a very critical component of our present, and they will continue being a very critical component of the future,” he said.

Small-format stores “may even be necessary if Ikea’s storefront reach is to extend outside large urban areas,” said Hart Posen, the Richard G. and Julie J. Diermeier professor in business at the University of Wisconsin-Madison. Posen also said smaller format stores can help retailers with showcasing — that is letting customers see, touch and feel the product in person.

But Posen added, “the efficacy of showcasing oriented, small-store retail depends significantly on the functionality of the e-commerce platform and Ikea’s ability to be much more effective at inventory management and outbound logistics.”

And while it’s not a new format, Ikea last month also announced the launch of a new initiative. The As-is online service allows members of the retailer’s loyalty program, Ikea Family, to reserve gently used products online for in-store pickup.

Delivering on omnichannel with an existing footprint

Ikea drew 69 million visitors to its stores and logged nearly 500 million visits online in 2022.

“It isn’t surprising that Ikea customers engage first with e-commerce channels,” Posen said. “Indeed,” Posen continued, “it would be surprising if they did not. It would also not surprise me if Ikea’s customers also considered pure e-commerce furnishing retailers such as Wayfair as well.” What we don’t know, Posen said, is how many of the 80% of customers who started on Ikea’s website did not come to the store.

For the fiscal year ending Aug. 31, 2022, Ikea U.S. said it had $5.9 billion in total sales, including food and services, and a nearly 19% increase in e-commerce sales.

Jordan Jewell, an analyst in residence at VTEX, an enterprise digital commerce platform, echoed that sentiment. Jewell said the metric of 80% of customers starting their shopping experience online isn’t unique to Ikea.

“That’s just how modern shoppers research and buy nowadays, especially in a category with relatively moderate price tags like furniture,” Jewell told Retail Dive.

“It’s clear that Ikea is getting their website and mobile app experience right; if they weren’t, their customers wouldn’t be using it as much as they do. Ikea is known for its clean, streamlined approach to furniture and home goods, so it’s really a logical extension of the brand that their website and app reflect that,” Jewell continued.

Jewell also said Ikea is good at inventory management.

“If you’ve ever tried to look up an item at your local Ikea, you’ll see that they often show the specific number of units in stock, along with the exact shelf number in the warehouse to find it, and a variety of options for how to get your purchased items, such as home delivery or buy online, pick up in store,” Jewell said.

But Posen said Ikea does face some ongoing challenges, including “making the omnichannel retail experience function effectively.” In that regard, Posen said, Ikea has lagged behind other retailers.

“Ikea has historically been somewhat ineffective at integrating store and warehouse inventories in a manner that makes shopping online and in-person a seamless experience,” Posen said.

Posen also characterized Ikea’s online shopping experience as sub-standard compared to online rival Wayfair. “While [Ikea’s] website need not look like Wayfair’s to be effective, it also does not do what the Ikea catalog used to deliver in terms of experience. In this sense, the web shopping experience is stuck in the middle, neither very efficient nor really engaging.”

At Ikea, inadequate inventory management systems that were not ideally designed for e-commerce also caused the integration of in-person and online retail to lag, Posen said. Like many retailers, it took Ikea time to recognize that outbound logistics — for example, sending an order of mixed items out of the warehouse to a customer — requires different technology and infrastructure than receiving pallets of merchandise into the store, which is the inbound part of the equation.

“Ikea has come to recognize these issues over the last few years, although fixing them seems to have been difficult and slow,” Posen said. “Their web infrastructure is now much improved, although I need more data to understand the extent to which their backend infrastructure is improved.”

The retailer is leveraging technology to improve logistics and inventory management. One way is through using drones to assist with warehouse inventory tracking. Öncü said the drones improved stock accuracy by reducing overselling by about 40%.

A blue in Ikea's signature blue and yellow colors hovers near a warehouse shelf
Permission granted by Ingka Group (Ikea)

Technology and automation enable Ikea to use its existing store footprint in new ways.

But Joe Laszlo, vice president of content for ShopTalk noted on stage that “whenever you’re talking about automation in physical stores, there’s always the question of ‘Well, what happens to the associates?’”

Asked if Ikea’s increasing adoption of robots and automation would result in staff redundancies, Öncü said no, citing a store in Finland as an example. When Ikea introduced robots and automation at that store, “we saw that we needed to rescale and upskill our coworkers to make sure they can handle it. But more importantly, when we were able to lower the price the [sales] volume went up so much that we had to actually recruit even more people.”

Stores are part of the brand experience

But when looking at the number of customers who initiate a digital retail experience, Posen said two questions remain. First, what share of potential Ikea customers who started online and wanted to finish their transaction online were unable to do so? And second, has the online store improved to the point where a customer who begins online and comes into the store to finish the transaction is doing so out of a desire to visit a store? Or is it because the online interface did not satisfy their needs?”

Regardless of how they come to visit in person, “in my view, Ikea is the quintessential experiential retailer,” Posen said. “One would not mistake their store experience for any other retailer — it is bright, engaging, family-friendly and cheerful. I think ‘playful’ would be the word I would use to describe the Ikea retail experience. To the extent that this is an integral part of the Ikea brand (along with the Scandinavian styling), I cannot imagine Ikea shying away from it,” Posen said. Jewell agreed.

“Ikea is famous for their in-store experience, where consumers are led through a winding path going through example bedrooms, kitchens, bathrooms and living spaces, all with Ikea products on display,” Jewell said. “These walk-through showrooms encourage product discovery — consumers end up buying things they didn’t know they wanted or needed in the first place.”

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